Before you apply for the Scientific Research & Experimental Development program (SR&ED), it’s important to understand what’s required. How does the Canada Revenue Agency (CRA) decide what qualifies and what doesn’t? In this guide, we’ll walk you through everything you need to know to make your work eligible for SR&ED.
- Want to skip ahead? Jump to 9 Common Questions the CRA Uses to Determine SR&ED Eligibility
What is SR&ED? Understanding the Program:
Before we get into the criteria, let’s clarify what SR&ED actually is.
According to the CRA, the Scientific Research & Experimental Development tax incentive program encourages Canadian businesses of all sizes to conduct research and development in Canada.
The goal is to motivate companies to innovate and push scientific or technological boundaries, which in turn supports Canada’s economic growth and global competitiveness. While the program is mainly aimed at Canadian-controlled companies, other businesses and even individuals can also participate.
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What Are the Eligibility Criteria for the SR&ED Program?
Under the Income Tax Act, SR&ED is defined in subsection 248(1) as follows:
- Basic research: research carried out to advance scientific knowledge, without a specific practical goal.
- Applied research: research done with a practical purpose in mind, also aimed at advancing scientific or technological knowledge.
- Experimental development: work done to achieve technological progress by creating new or improved materials, devices, products, or processes.
In other words, to qualify as SR&ED, your work must demonstrate the following:
- Technological Advancement – your work advanced scientific or technological knowledge, as described in a) and c).
- Technological Uncertainty – your project aimed to address challenges where existing scientific or technological knowledge was insufficient
- Technical Content – your work followed an iterative process to tackle these uncertainties.
It’s important to note: even if your project doesn’t succeed in overcoming scientific or technological uncertainty, it can still qualify for SR&ED tax credits.
Guide to SR&ED Work Eligibility:
According to CRA’s guidelines for Eligibility of Work for SR&ED investment tax credits, they assess projects by asking two key questions: Why the work is being done and How it’s carried out.
The Why Question
As we’ve seen, your work must aim to advance scientific knowledge or achieve technological progress. Both are eligible for SR&ED, so it doesn’t matter which applies. What matters is that your goal is to push science or technology forward.
But how do you know when new knowledge is needed? It’s when current information isn’t enough to reach your goal. This is where scientific or technological uncertainty comes in.
Recognizing this uncertainty is essential for your work to be considered SR&ED. Your project must attempt to address this challenge. If you simply use existing knowledge to avoid uncertainty, your work won’t qualify.
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The How Question
How you carry out your work is key to determining if it qualifies as SR&ED.
Your work must use a systematic approach to investigate and seek scientific knowledge—not just routine work.
If that sounds a bit abstract, here’s what a systematic approach means:
- Forming a hypothesis based on known facts to figure out how to solve a problem.
- Testing your hypothesis through experiments and/or analysis.
- Drawing conclusions from the results of your experiments.
- Documenting the evidence as you go.
Bonus: click here to download this 20-page SR&ED Guide and get all the details you need to prepare a successful claim.
SR&ED Examples
Experimental Development
This is by far the most common type of claim. It covers work aimed at creating or discovering technological knowledge to develop new or improved products or processes. This includes technological breakthroughs, software development, and research in artificial intelligence or machine learning.
For software, this could mean systematically improving how current platforms work together. In machine learning, it might be developing a new image recognition framework.
With artificial intelligence, SR&ED claims can be more challenging, since some believe it’s just about training models and doesn’t require experimentation. However, using AI to enhance existing algorithms through experimentation can qualify.
Image by Riekus from Pixabay
Basic Research
This type of research is done purely to advance scientific knowledge, without a specific practical use in mind. It’s usually carried out by universities, government labs, or non-profits. For example, studying a new virus to understand its characteristics is basic research.
Image by Johnson Martin from Pixabay
Applied Research
Applied research is similar to basic research, but it’s done with a practical goal in mind. For example, using what you’ve learned about a new virus to develop a vaccine is applied research.
Support Work
Support work on its own usually doesn’t qualify as SR&ED. But if it’s done specifically to support basic research, applied research, or experimental development in Canada, it can be included.
Image by WikiImages from Pixabay
Ineligible Work
The CRA has clarified that not every activity is eligible for SR&ED. To help, they've listed types of work that are excluded from claims. These include:
- Quality control or routine testing of products, devices, materials, and processes
- Sales promotion or market research
- Routine data collection
- Style changes
- Research in social sciences or humanities
- Commercial production of new or improved materials, devices, or products, or the commercial use of new or improved processes
- Prospecting, exploring, or drilling for minerals, petroleum, or natural gas, as well as their production
FIND OUT IF YOU QUALIFY FOR SR&ED – FREE ASSESSMENT
9 Common Questions About the CRA and SR&ED Claims
1) What is the deadline for corporations to submit an SR&ED claim? What about for individuals?
Corporations have 18 months from the end of their tax year to file an SR&ED claim for eligible expenses. Individuals have 17.5 months to file.
2) How long does it take to get a refund after filing an SR&ED claim?
According to the CRA’s current service standards, claims that are accepted as filed are processed within 60 calendar days after the completed claim is received. If your claim is selected for audit or review, it will take 180 calendar days after the completed claim is received.
3) Does filing an SR&ED tax credit claim increase your chances of being audited?
No. SR&ED tax credit reviewers are separate from regular CRA tax auditors. They only look at your claim, not other parts of your business.
4) Can a company that hasn’t made a profit or paid taxes yet still be eligible for an SR&ED tax credit?
Yes. As long as your company is a Canadian-controlled private corporation, you can claim the tax credit. Other types of corporations may be eligible for a non-refundable tax credit against income taxes.
5) Can I claim both the SR&ED and OIDMTC tax credits?
You can claim both, as long as you’re not claiming the same costs for each. The OIDMTC FAQ page explains that you can’t claim labor costs for OIDMTC if you’ve already claimed them for SR&ED. Also, it’s usually better to claim SR&ED first, since it’s processed faster and often results in a larger refund.
6) Can a company that received IRAP funding still claim an SR&ED tax credit?
Yes, but the IRAP funding you received will be deducted from your SR&ED tax credit.
7) What if the project didn’t succeed? Can I still claim an SR&ED tax credit?
Yes. Your project can qualify even if it was abandoned, postponed, or didn’t achieve its goal—as long as you can show you intended to make a technological advancement.
8) Are we eligible for an SR&ED tax credit if similar products already exist?
This is a gray area, so there’s no simple yes or no. It depends on whether your project represents a development for your business. Two companies might pursue the same goal in different ways. You can base your project on something that exists, as long as you add something new or adapt existing processes in a new way.
9) Can a company still get an SR&ED tax credit if most of the R&D work is done by contractors?
It depends. You must own the work you’re claiming for, and the CRA requires that a Canadian contractor be at “arm’s length”—meaning you can’t be related to or have control over them.
Still have questions?
If you’re still unsure whether your work qualifies for the SR&ED tax credit after reading this guide, don’t worry. We’re here to help. Contact us for a complimentary SR&ED assessment—we’ll review your project and let you know if it meets the criteria for SR&ED.
